When it comes to accounting principles, the treatment of goodwill can vary significantly between International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP).
In this blog post, we will explore the differences in the treatment of Goodwill under IFRS and GAAP and the implications for financial reporting.
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Goodwill Accounting
Due to the growing importance of intangible assets, there has also been a significant change in the standards associated with the accounting treatment of goodwill or goodwill accounting.
International Accounting Standard Board issued the International Financial Reporting Standard (IFRS) 3- Business and Combination in 2004. This new standard provides significant changes for the accounting treatment of intangible assets, goodwill and business combinations.
According to new standards, firms must not amortise the goodwill, but it must be tested for annual impairment. The new accounting rule moved the head of American General Accepted Accounting Principal (US GAAP), which introduced such an approach a few years earlier for the accounting treatment of Goodwill.
On July 20, 2001, the Financial Accounting Standard Board (FASB) issued standard statements such as; Standard -141 Business Combination and 142- Goodwill and Other Intangible. Under the US GAAP, goodwill is not amortised but must be tested for impairment. A firm does not consider goodwill as a separate asset, so it is evaluated for impairment as a part of the cash-generating unit under IFRS or reporting unit in US GAAP.
U.S. GAAP Treatment of Goodwill Impairment
U.S. GAAP (Statement of Financial Standard Accounting Board -142 business Combinations and 142- Goodwill and Other Intangible assets) laid down the rules for the accounting treatment of Goodwill in the books of account.
Under U.S. GAAP, the value of goodwill is recorded as the excess of the cost of an acquisition price over the fair value of acquired net assets. It will be recorded only when the carrying amount of goodwill exceeds its implied fair value.
Before the new accounting standards, companies generally recorded the total amount of goodwill in the books. They did not assign the value of goodwill to the individual reporting unit of business.
A reporting unit is defined in the Statement of Financial Accounting Standard 142.30 as an operating unit or its component. Companies assign the value of goodwill to report units by comparing the estimated value of the operating unit with the fair value of the reporting unit’s identifiable net assets. Two-step impairment should be followed to identify potential goodwill impairment and measure the amount of impairment loss to be recognised if any.
Step 1:-Test for Impairment Goodwill
The companies should follow the first step to identify the reporting unit’s fair value that has goodwill.
Compare the fair value of the reporting unit with its carrying amount.
If the carrying value of the reporting units exceeds its fair value (carrying value > fair value), continue to the next step; otherwise, stop.
Step 2:- Measures the Amount of Goodwill Impairment Loss
To calculate the impairment loss of goodwill, the companies should follow the accounting standards rules.
(a) Allocate the fair value of the reporting unit step 1 to identifiable assets and liabilities of the reporting unit based on their current fair value;
(b) Allocate any excess fair value to goodwill;
(c) compare the amount allocated to goodwill In step 2(b) with the balance sheet carrying the value of goodwill
(d) An organisation can recognise an impairment loss on goodwill by reducing the carrying value to its fair value computed in step 2b.
Treatment of Goodwill as Per IFRS
Initial Recognition
- Goodwill arises when a company acquires another company and pays more than the fair value of its identifiable assets and liabilities.
- This excess amount represents the intangible benefits of the acquisition, such as a strong brand name, loyal customer base, or skilled workforce.
- Under IFRS 3, goodwill is recorded at its fair value, which is the difference between the acquisition cost and the fair value of the identifiable net assets acquired
Subsequent Measurement
- IFRS takes an impairment-only approach for goodwill. This means goodwill is not amortized over time.
- Instead, companies must test goodwill for impairment annually or whenever there’s an indication that it might be impaired [IFRS 3.56].
- An impairment test involves comparing the recoverable amount of the cash-generating unit (CGU) to its carrying amount. The CGU is the smallest identifiable group of assets that generates cash inflows independent of other assets [IFRS 36.6].
- If the recoverable amount is less than the carrying amount, an impairment loss is recognized in the income statement [IFRS 3.59].
Conclusion
Both IFRS and US GAAP (Generally Accepted Accounting Principles) require companies to assess goodwill for impairment, but their approaches differ. IFRS focuses on the current value of the cash-generating unit (CGU) where goodwill resides, recognizing an impairment loss if the value falls. Conversely, regardless of current value fluctuations, US GAAP amortizes goodwill over time. This can lead to a smoother expense pattern under US GAAP, but IFRS may provide a more timely picture of a company’s intangible asset health.
FAQs
IFRS Accounting Standards require testing goodwill for impairment in the year of acquisition, US GAAP does not. If goodwill arises from a business combination in the current annual period, the CGUs to which goodwill has been allocated need to be tested for impairment during that annual period.
How is goodwill treated under current GAAP IFRS? ›
Under IFRS 3, Business Combinations, goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. Goodwill is not amortised but must be tested annually for impairment.
Do you amortize goodwill for IFRS? ›
The International Accounting Standards Board (IASB) voted in November 2022 to retain the impairment-only model for the subsequent measurement of goodwill and not introduce an amortization approach.
Is goodwill amortised under US GAAP? ›
Under GAAP (“book”) accounting, goodwill is not amortized but rather tested annually for impairment regardless of whether the acquisition is an asset/338 or stock sale.
Are goodwill impairment testing procedures the same under IFRS and US GAAP? ›
Goodwill is tested more frequently than annually if indicators of impairment exist. The indicators are similar to US GAAP, but not identical. For example, IFRS considers an increase in market rates that is likely to impact discount rates as a potential indicator of impairment while US GAAP does not.
How is goodwill treated in IFRS vs US GAAP? ›
Under IFRS Accounting Standards, a CGU is evaluated as a whole (i.e. the goodwill and all other assets), which can lead to differences in the measurement of impairment compared to US GAAP. IFRS Accounting Standards require testing goodwill for impairment in the year of acquisition, US GAAP does not.
How is goodwill calculated under IFRS? ›
Goodwill is calculated by taking the purchase price of a company and subtracting the difference between the fair market value of the assets and liabilities. Companies are required to review the value of goodwill on their financial statements at least once a year and record any impairments.
How does IFRS treat negative goodwill? ›
Accounting for Negative Goodwill
According to US GAAP and IFRS, both goodwill and negative goodwill must be recognized and accounted for in the acquiring company's financial statements.
Is goodwill no longer considered an intangible asset under IFRS? ›
Examples of intangible assets include computer software, licences, trademarks, patents, films, copyrights and import quotas. Goodwill acquired in a business combination is accounted for in accordance with IFRS 3 and is outside the scope of IAS 38.
What is impairment of goodwill under IFRS? ›
The impairment test of goodwill therefore compares the carrying amount of the group of assets containing the goodwill to the recoverable amount of that group of assets. If the carrying amount of the group of assets exceeds its recoverable amount, an impairment loss is recognised.
GAAP prohibits the reversal of all impairment losses. But, under IFRS, impairment losses for intangibles other than goodwill and for fixed assets can be reversed. Reversal of impairment losses under IFRS are capped at the asset's initial carrying amount.
What is the difference between intangibles IFRS and US GAAP? ›
Intangibles
Under IFRS, costs in the research phase are expensed as incurred. Costs in the development phase may be capitalized based on certain factors. On the other hand, US GAAP generally requires immediate expensing of both research and development expenditures, although some exceptions exist.
What is the difference between US GAAP and IFRS debt? ›
Unlike IFRS Accounting Standards, US GAAP does not require non-SEC registrants to disclose specific qualitative or quantitative information about liquidity risk, including the risk that debt could become repayable within 12 months of the reporting date.
Is goodwill amortized for IFRS? ›
In conclusion, the IFRS standard-setting body does not intend to reintroduce systematic goodwill amortization, but promises the benefit of improved disclosures to both preparers and users.
What is the difference between IFRS and US GAAP depreciation? ›
Fixed Assets: Under GAAP, fixed assets such as property, plant, and equipment (PP&E), must be recorded at historical cost (the purchase price), and depreciated accordingly. Under IFRS, fixed assets are also valued at cost, but companies are allowed to revalue fixed assets to the fair market value.
Can you reverse goodwill impairment under IFRS? ›
In a cash-generating unit, goodwill is reduced first; then other assets are reduced pro rata. The depreciation (amortisation) charge is adjusted in future periods to allocate the asset's revised carrying amount over its remaining useful life. An impairment loss for goodwill is never reversed.
What is IFRS 3 treatment of goodwill? ›
The goodwill is approached by the International Financing Reporting Standard IFRS 3 Business combinations and it is defined as the unidentified part paid by a purchaser with the occasion of a business combination. devaluation, it is amortized (it is deducted from its initial value);
Is goodwill impaired on IFRS or Aspe? ›
IFRS requires an impairment test for goodwill on an annual basis. ASPE requires an intangible asset with an indefinite life to be tested for impairment whenever events or changes in circ*mstances indicate that its carrying amount may exceed its fair value.
